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Delegated Legislation Committee Debates

Code of Audit Practice for Local Authorities and the National Health Service in England and Wales

Fourth Standing Committee on Delegated Legislation

Wednesday 22 March 2000

[Mr. Andrew Welsh in the Chair]

Code of Audit Practice for Local Authorities and the National Health Service in England and Wales

4.30 pm

The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Ms Beverley Hughes): I beg to move,

    That the Committee has considered the Code of Audit Practice for Local Authorities and the National Health Service in England and Wales.

It is a pleasure to be in Committee under your chairmanship, Mr. Welsh. I am sure that we shall make excellent progress.

The code is the Audit Commission's document. As statute requires, it has been prepared by the independent commission to be used by the independent professional auditors that the commission appoints to audit local government and national health service bodies. My role is to bring the code to the Committee for consideration and, I hope, approval.

In essence, the code is two codes. First, it is the code to replace the existing code of audit practice. The present code comes to the end of its life in July and, under statute, a replacement code must be prepared and approved by Parliament. The code of audit practice prescribes the way in which external auditors of local authorities and national health service bodies must carry out their financial audit tasks. Secondly, it is a code that deals with best value and the responsibilities of local authorities and national health service bodies must carry out their financial audit tasks. Secondly, it is a code that deals with best value and the responsibilities of local authority auditors in relation to the audit of best value performance plans. The code prescribes the way in which auditors should conduct their audit of best value performance plans, the specific issues that they must check and the reports that they must complete. If approved by the Committee and another place, the composite code covering traditional audit and best value audit will come into force and apply throughout England and Wales.

The Audit Commission prepared the code. As I said, it is the commission's document. It consulted extensively throughout the preparation from the early planning stage to the final document that is now before us. It consulted key organisations that represent local government and the health service, the accountancy profession and the national audit agencies at each stage. It also consulted all audited bodies on the key issues and the options for change in developing the code.

That extensive, inclusive and collaborative work is the way to develop such documents as the code of audit practice. A wide consensus among all concerned provides the assurance that such documents provide an effective contribution to the accountability framework. In preparing the code, the commission took account of wider audit developments. It reflects the development towards the risk-based approach to audit, auditors' new responsibilities in relation to regularity in NHS bodies, increased emphasis on work that is related to standards of financial conduct within audited bodies and the new duty to audit best value performance plans.

I shall describe briefly the contents of the code. It is a high-level document. It focuses on the core requirements imposed on auditors. It does not repeat or include any detail that simply summarises the requirements of professional auditing standards, which is available in related guidance. The fact that it is a single code reflects the integrated nature of public sector audit when auditors should, in assessing best value performance plans, draw on other work done in relation to resources and performance information and inspections.

The code sets out the general principles to be followed by the auditors and the audit framework within which auditors will carry out their responsibilities. It describes the auditor's responsibility in relation to the views of the financial aspects of corporate governance, the audit of accounts and reviews of aspects of performance management.

The foreword and section 1 set the code in context. They identify the general principles to be followed by auditors in delivering their objectives and remind them of the need to exercise their professional judgment and act independently of the commission and audited bodies.

Section 2 sets out the audit framework. It provides guidance to auditors on how they should plan audits and the outputs that they must deliver. In planning their work, auditors must address the operational and financial risks that apply to the body and must produce an audit plan tailored to the conduct of the audit and the circumstances of the body.

Section 3 sets out auditors' duties for reviewing the financial aspects of corporate governance. It is the responsibility of audited bodies to put in place suitable arrangements to ensure proper conduct of their financial affairs. Auditors have a duty to review the systems to ensure that they are adequate to maintain the legality of transactions. They must ensure that the financial standing of the body is soundly based and that it has adequate and effective systems of internal financial control. Auditors must also ensure that the body has effective systems to maintain proper standards and prevent and detect fraud and corruption.

Section 4 prescribes the way in which auditors should audit the financial statements, give their opinion and report on the overall financial health of the audited body. Section 5 sets out auditors' responsibilities for reviewing the aspects of performance of audited bodies. Auditors of local government and the national health service bodies have a duty to review and report on the arrangements that a body has in place to secure economy, efficiency and effectiveness in the use of its resources.

In local government, auditors also have a duty with the introduction of best value to audit the annual best value performance plans. They are required to ensure that the plans have been applied in accordance with the legislation and guidance, including whether the body has adequate systems to collect and record performance information. The code details the reports that auditors must make on the scope and extent of work carried out, and states that they should give an opinion on the plan and make recommendations arising from their performance audit work.

Schedule 1 to the code sets out the special powers and duties of auditors in relation to the public and situations in which they have reason to suspect that unlawful expenditure has occurred. Where auditors identify any unlawful expenditure in a NHS body, they must inform the Secretary of State. They must also bring into the public domain through a public interest report any matter that they consider appropriate, and the health body must consider the report during the public part of a meeting.

In local government, auditors must also prepare public interest reports in those circumstances, which the authority must consider at a public meeting. Auditors must also consider information brought to their attention by local people, who can question and lodge objections with auditors about items in the accounts. The schedule also provides guidance to auditors on how they should exercise their powers to surcharge individuals where unlawful expenditure is identified in a local government body. We are seeking in the Local Government Bill to repeal the surcharge provisions and to amend auditors' powers for situations in which they have reason to believe that a local government body is about to incur unlawful expenditure. If the Bill is enacted, the commission will revise the schedule.

The code will come into effect once approved here and in another place, and apply to all audits currently in progress and for the financial year commencing on 1 April 2000. Where an audit is in progress, it will be conducted in accordance with the guidance in the transitional annexe of the code, which is essentially the guidance from the existing code, that is being reapproved for the transitional period to provide continuity of audit for work in progress.

The code has been drafted in the context of our major reform and modernisation agendas for local government and the national health service. Our proposals for councils to have new constitutions focused on effective local scrutiny will significantly enhance councils' efficiency, transparency and accountability. Effective external audit is an essential part of such a scrutiny regime. The code provides assurance that an effective independent audit will be carried out.

Effective external audit is also an essential part of the development of a modern, patient-focused health care system for the NHS. The code will ensure that public money is safeguarded and properly accounted for during the transition to a new, modern NHS.

The code is an important document. It is a key element of the accountability framework for local government and the NHS. It is through audit, whether it be traditional financial or best value performance, that local people can have confidence in the information that they receive about their council's performance. It is through audit that everyone can be assured that resources are being used effectively and for the purpose for which they were intended. I commend the document to the Committee.

4.41 pm

Mr. Nigel Waterson (Eastbourne): I add my thanks for your chairmanship this afternoon, Mr. Welsh, and I hope that our deliberations will not detain you unduly. I thank the Minister for bringing the important provisions of the code so movingly to life in her explanation.

We broadly welcome the provisions. It is sensible to have a single code. As the Minister said, wide consultation with professional bodies and others has, rightly, taken place. Any provision that becomes out of date or inappropriate will presumably be considered as part of a rolling review. I understand, although the Minister might want to correct me, that that will be a five-yearly event. Accounting standards and principles never seem to stand still, and no doubt any points that arise in practice, including the one that the Minister mentioned in relation to the Local Government Bill, can be dealt with in future.

It is sensible and helpful that the code has stripped out all the detail. That is why it is called a high-level document, having left the detail to professional standards set by professional bodies and to other guidance issued from time to time. I am sure that that will be helpful, not least because presumably it contributes to our having a slightly shorter document to consider.

I have a handful of points to make, and if the Minister cannot deal with them today, she may write to me and other members of the Committee. Paragraph 16 of the explanatory memorandum to the code refers to the anxiety expressed as a result of the consultation

    about the continuation of value for money auditing at the local level, given the introduction of best value.

I shall discuss best value further in a moment. According to the explanatory memorandum, the commission has already said that the nature and extent of local value-for-money audit work will change in the light of best value, and a commitment has been made about that. It would be helpful and informative if the Minister could sketch in a bit more detail on that matter.

The Minister is right to emphasise the importance of the code's aim for both local government and the NHS-to ensure that

    public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.

No member of the Committee would disagree with that objective.

The Minister confirmed-she may wish to reconfirm it in greater detail-that the code would be kept under review. I understand that under both the Local Government Act 1999 and the Audit Commission Act 1998, the commission is required to prepare and keep under review the code of practice. As I said earlier, anything inappropriate, outdated or inadequate can be tidied up. The entire document is based on the commission's concept of what it calls an integrated audit. We would all agree that overlapping, or even underlapping, regimes have sometimes been messy in terms of publc financial accountability. The code-if I, as a non-accountant, may say-will go a long way towards dealing with those problems.

I said that I wanted to mention best value-about which I rarely lose an opportunity to talk. The Minister well knows the view of Opposition Members that best value should be supported in principle and that it would not have been possible in local government had not compulsory competitive tendering lain the groundwork during the years of the Conservative Government. However, we think that the Government have been overly prescriptive in their approach to best value, which will add to the burdens that the code places on auditors. We know that some councils will have 179 separate performance indicators to consider and that, in turn, will add enormously to the burden, not only on councils, officials and elected councillors but on their auditors-and presumably on the finances involved.

Only a few weeks ago, we debated exempting most parish councils from the strict regime of best value and I spoke on the issue. There is no doubt that best value is an unnecessarily heavy burden on local authorities, simply because of the highly prescriptive and detailed fashion in which the Government have chosen to approach it. I would like the Minister to confirm that she and her officials will gather and publish information about the cost to individual local authorities of the best value regime. I am already receiving quite a lot of individual representations from smaller local authorities on the cost to them of that highly detailed regime. I think that we deserve to know the cost as, to use an expression to which the Government are wedded, it is ``rolled out'' as a concept.

On the other side of the coin, I am sure that the Minister and her hon. Friends want to ensure that this does not become a box-ticking exercise; if the document is anything to go by, that is unlikely. Again, we wish to avoid that. The Government can take credit for what I understand, from reading some of the accountancy press, is a projected national shortage of auditors. One of the Government's lasting achievements when they leave office might be the creation of a massive increase in the auditing industry.

The Opposition position has always been consistent: public money must be safeguarded and accounted for as competently as possible, but without an unnecessary burden of cost or bureaucracy on local authorities-or, indeed, on the national health service. We all know that no matter how much money is committed to the national health service, there will always be a need for more. I hope that the adoption of the code in the context of the NHS will not mean the diversion of significant extra resources away from patient care.

The Government talked about the transition to the new modern NHS. I had not appreciated that we were in a transitional period; I thought that 1999 was the year of delivery. We will no doubt be told at some stage when that delivery will occur. With those reservations and, I hope, constructive comments I am pleased to support the approval of the code.

 
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